Scope affirms BB- bond rating of MITEC; CICR affirmed at BB-; Outlooks Stable

The rating affirmation is based particularly on MITEC Automotive AG’s (‘MITEC’) positive operating performance in line with expectations, improved EBITDAR margin and leverage, as well as its continued strong market position.

Scope Ratings (‘Scope’) affirms the BB- rating of the EUR 25m senior unsecured corporate bond (7.75% 2012/2017) of MITEC. The instrument rating is based on a Corporate Issuer Credit Rating (CICR) of BB-. Both Outlooks are Stable.

The BB- rating of the German based automotive supplier MITEC is supported by its strong market position as a small tier 1 supplier in the growing market for balancer systems, its well-diversified geographical spread and ample order backlog. MITEC’s adjusted EBITDAR stood at 8.9% in FY 14 from 8.3% in FY 13, impacted by the postponement of substantial orders from a core customer. Scope expects it to increase to over 12% by FY 16, bolstered by materialisation of MITEC’s sizable order backlog and the conversion of recent R&D activities as new products turn into future revenue streams (R&D ratio up to 2.0% in FY 14).

Negative rating factors include MITEC’s relatively small size, with an adjusted EBITDAR of EUR 13.5m in FY 14, and relatively limited product offering, with 76% of total revenues derived from its core product, balancer systems.

Driven by cash flows buoyed by its order backlog, Scope expects MITEC to further reduce its high lease-adjusted net debt/EBITDAR to 4.5x in FY 16 (FY 14: 6.9x). For the same reason, Scope assumes MITEC’s EBITDAR fixed charge cover to improve to 2.7x in FY 16 (FY 14: 1.8x).

The BB- rating of the senior unsecured corporate bond is based on MITEC’s CICR and reflects the structural subordination to the secured debt issued by MITEC Automotive AG and its US subsidiary MITEC Powertrain Inc.

KEY RATING DRIVERS

Tier 1 supplier in the balancer systems niche market. MITEC is a tier 1 supplier to major auto manufacturers with an assumed global market share of 10% in its niche balancer systems market. Scope considers MITEC’s market position as very solid, partly offsetting inherent cyclicality and substitution risks in the global automotive suppliers sector.

Solid geographical diversification to broaden further. In FY 14, 46% of MITEC’s revenues were generated in Europe; 19% through its Chinese joint venture and the remaining 35% in ROW, predominantly for US automotive manufacturers. With the help of its US and Chinese subsidiaries, Scope expects MITEC to reduce dependence on the European car manufacturing industry through more revenue generated in the US and Asia.

Customer structure carries concentration risk. The company currently shows a strong customer concentration with the three largest customers accounting for a high 83% of FY 14 sales. Given the order backlog to FY 18, Scope expects this customer concentration to remain above 80% with an increasing bias towards automotive manufacturers with weaker financial profiles. The latter is seen as credit negative. Scope expects this bias to improve slightly in the medium term following recent negotiations with premium car makers.

EBITDAR margin expected to improve further. MITEC’s adjusted EBITDAR margin declined from 17.8% in FY 10 to a bottom level of 8.3% in FY 13, due to material delays in order deliveries to a core customer and associated high pre-financing costs. In FY 14, MITEC’s EBITDAR margin recovered to 8.9%. With the order backlog materialising and the conversion of recent R&D activities into new innovative products, Scope expects MITEC’s EBITDAR margin to improve above 12% in FY 16.

Peaking leverage to decrease. The rating incorporates the company’s high lease-adjusted leverage (debt/EBITDAR) of 7.6x in FY 14, which improved from 8.2x in FY 13 (net debt/EBITDAR FY 14: 6.9x). Scope expects MITEC’s peaking net leverage to decrease to 4.5x in FY 16, backed by improving profitability, stable debt development and the company’s cash cushion.

Positive operating cash flows and reasonable fixed charge coverage. The rating reflects MITEC’s track record of positive operating cash flows in the last five FYs (2010-2014). As a result, MITEC displays a reasonable fixed charge coverage (EBITDAR fixed charge cover FY 14: 1.8x vs 1.7x in FY 13). Scope estimates an EBITDAR fixed charge cover of 2.7x in FY 16, driven by revenue growth and improving profitability.

Ample order book provides cash flow visibility. The company’s long-term order backlog for FY 15-FY 18 totals EUR 760m, representing 5.1x MITEC’s FY 14 sales. Although it carries some execution risk – particularly in light of its customer concentration – the order backlog provides strong visibility and stability on MITEC’s future revenues and cash flows. According to Scope’s calculations, MITEC’s order backlog is sufficient to keep the company’s EBITDA above EUR 12m, even after a conservative safety discount of 20% on MITEC’s booked business.

Sufficient liquidity. MITEC’s interest-bearing debt amounted to EUR 95m in June 2015. The company’s liquidity cushion of EUR 10m in June FY 15 (EUR 9.0m at YE 13) plus factoring line of EUR 10m are sufficient to cover FY 15 debt maturities of EUR 7.0m comfortably. Scope believes any risks arising either from refinancing/prolonging the EUR 33m bank debt facility from MITEC’s house banks by the end of FY 16, or refinancing the EUR 25m corporate bond in March FY 17 are limited, given the order backlog and expected solid financial performance.

Senior unsecured corporate bond rating of BB- at the same level as CICR. The BB- corporate bond rating reflects MITEC’s CICR as well as the seniority and asset pledges of MITEC’s debt positions. Given the absence of a security package, MITEC’s corporate bond is structurally subordinated to the secured debt issued by MITEC Automotive AG and its US subsidiary, MITEC Powertrain Inc., totalling roughly EUR 70.5m as of June FY 15. Scope expects an average recovery for MITEC’s EUR 25m senior unsecured corporate bond in the theoretical case of a company default.

Outlook
The Outlooks for the CICR and bond rating are Stable. The Stable Outlooks are based upon MITEC’s strong market position and supportive backlog, backed by overall favourable market conditions in Europe and the US.

Current ratings could come under pressure if adverse market conditions weaken the company’s cash flows and ability to reduce its high leverage below a threshold of 5.0x (net debt/EBITDAR) by YE 16.

A positive rating action would require a faster-than-expected deleveraging with stronger credit metrics, such as an adjusted debt/EBITDAR below 3.5x and an improved EBITDAR fixed charge coverage above 4.0x. An upgrade would also depend on MITEC’s ability to significantly improve its customer diversification (Top 3 of revenues <50%).

Regulatory disclosures

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Timo Schilz, Lead Analyst.
Responsible for approving the rating: Dr. Stefan Bund, Committee Chair.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest

The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

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Methodology
The methodology applicable for this rating (Corporate Rating Methodology, Rating Methodology - European Automotive Suppliers) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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